(The following statement was released by the rating agency)
Dec 05 -
Summary analysis -- NTPC Ltd. ------------------------------------- 05-Dec-2012
CREDIT RATING: BBB-/Negative/-- Country: India
Primary SIC: Electric Services
Credit Rating History:
Local currency Foreign currency
30-Jan-2007 BBB-/-- BBB-/--
02-Feb-2005 BB+/-- BB+/--
Rating Rating Date
US$300 mil 5.875% med-term nts ser 01 due
03/02/2016 BBB- 30-Jan-2007
US$2 bil med-term note Prog 02/15/2006: sr
unsecd BBB- 30-Jan-2007
US$500 mil 5.625% med-term nts ser 02 due
07/14/2021 BBB- 26-May-2011
US$500 mil 4.75% med-term nts ser 03-01 due
10/03/2022 BBB- 24-Sep-2012
The rating on India-based power producer NTPC Ltd. reflects the company’s dominant market position, cost-competitive operations, strong cash flow measures and liquidity, and a favorable regulatory environment. NTPC’s aggressive capital expenditure plans, the weak credit quality of its customers, and the country and macroeconomic risk associated with India (unsolicited rating BBB-/Negative/A-3) offset these strengths.
The rating on NTPC is lower than the company’s stand-alone credit profile of ‘bbb’ to reflect our expectation of potential negative intervention from the government if the sovereign comes under significant fiscal or external stress. As of Sept., 30, 2012, the Indian government owns 84.5% of the company. NTPC had an installed capacity of about 39,674 megawatt (MW) (including about 4,864 MW through joint ventures). The company (including joint ventures) accounted for about 18.5% of India’s installed capacity and over 27.6% of the power generated during the fiscal year ended March 31, 2012.
We assess NTPC’s business risk profile to be “satisfactory.” We expect NTPC to maintain its good operating performance due to the favorable regulatory environment, the company’s efficient operations, and its increasing generation capacity. NTPC’s average selling price of power generation is one of the lowest in the industry. The company’s EBITDA margins were therefore strong, at more than 22% per year for the past five years. We believe the company already has a large number of projects in the pipeline to help it meet its 2032 installed capacity target of 128,000 MW.
We expect disruptions in NTPC’s coal supply to have a limited impact on its operations over the next 18-24 months. However, recent shortfalls in domestic coal supply from Coal India Ltd. and the weakening credit quality of state electricity boards have hit the plant load factor for NTPC’s coal- and gas-fired power plants. Nevertheless, NTPC’s operating efficiency has historically been high and we expect this to continue, now that Coal India has committed to address some of the fuel supply problems. NTPC’s plant load factor of 85% and availability factor of 88.4% in 2011-2012 is higher than the national average. The company’s management has taken appropriate measures to counter the disruption in supply. These include signing long-term coal supply agreements and development of government-offered coal blocks.
We assess NTPC’s financial risk profile as “intermediate.” Our view is based on our expectation of: (1) steady cash flows from the company’s existing operations with funds from operations (FFO) of more than INR120 billion every year over the next two to three years; and (2) capital expenditure of more than INR200 billion annually during the same time.
We believe NTPC’s high capital expenditure will result in higher debt, weakening the company’s financial metrics. We, however, expect the financial performance to remain within our expectation for the rating considering that NTPC’s ratio of average FFO to gross total debt is likely to be more than 20% and its debt-to-capital ratio is likely to be about 45% over the next 12-24 months. The company has a significant level of cash and cash equivalents as of Sept. 30, 2012.
State electricity utilities (SEUs), the main customers of NTPC’s power production, have weak credit profiles, in our view. Nevertheless, ongoing government support to the company and the tripartite agreement between the Indian government--on behalf of the government-owned utilities including NTPC--the state governments (on behalf of the SEUs), and the Reserve Bank of India , mitigates the risk of payment delays from SEUs. NTPC’s collection efficiency has been 100% over the past several years.
In accordance with our criteria for government-related entities, our view of a “very high” likelihood of extraordinary government support in the event of financial distress is based on our assessment of the following NTPC characteristics:
-- “Very strong” link with the government. We expect the government to retain its majority shareholding in the company, with the Ministry of Power having administrative control.
-- “Very important” role for the government. The company’s public policy role of increasing India’s power generation capacity and its dominant position in a country with power deficits determine its activities.
In our view, NTPC has “strong” liquidity as our criteria define the term.
Our liquidity assessment is based on the following factors and assumptions:
-- We expect the company’s liquidity sources (including cash, funds from operations, and credit facility availability) over the next 12 to 18 months to exceed its uses by more than 1.5x.
-- NTPC’s liquidity sources over the next 12 months are about INR 560 billion, consisting of cash, FFO, and undrawn credit facility. The company’s cash balance is approximately INR186 billion as of Sept. 30, 2012.
-- We expect the company to have steady recurring cash flows--with FFO averaging more than INR120 billion per year over the next two-three years--and maintain an EBITDA interest coverage ratio above 3.5x.
-- The company’s liquidity uses are about INR290 billion for capital spending, debt maturities, working capital needs, and shareholder dividends. It has debt of about than INR47 billion due in one year.
-- We believe net sources would be sufficient to cover its uses, even if EBITDA declines by 20%. The regulated nature of returns and the company’s efficient operations should enable it to maintain high margins.
NTPC also has about INR82 billion in 8.5% tax-free state government bonds that the company can sell in the market. NTPC has good relationships with its banks, in our assessment, and has a good standing in the credit markets.
The negative outlook on NTPC is consistent with that on the sovereign rating on India and reflects the company’s sensitivity to government intervention.
We could lower the rating on NTPC if: (1) we lower the sovereign credit rating; (2) ongoing support from the government declines; or (3) the company incurs large debt-funded capital expenditures and its cash flows weaken such that its adjusted FFO-to-debt ratio reduces to 10% on a sustainable basis; or (4) the company’s stand-alone credit profile deteriorates substantially, which we consider unlikely in the next 12-18 months.
We could revise the outlook to stable if we take a similar action on the sovereign rating on India.
Related Criteria And Research
-- Rating Government-Related Entities: Methodology And Assumptions, Dec. 9, 2010
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008